By: Daniel Boxman of United Northern, NMLS ID# 1077102
One of the first (and very important) steps in qualifying for a mortgage is to have your bank run your credit report. Your credit report has a major impact on what type of mortgage loan you qualify for.
What is on my credit report?
Your credit report will consist of three separate scores from each of the three major credit bureaus: Equifax, Transunion and Experian. The scores from each bureau are usually different of varying degrees. The report also consists of all your monthly payment obligations and your payment history on each one. What banks do with your credit report is to make sure you have a history of making your payments and making them on time. If you are behind on any of your payments, the bank will see this on your credit report. They also take a look at the amount of debt you have, and see based on how much money you bring in each month if it could potentially be an issue to make your mortgage payment.
The score used by your bank for qualification purposes will be the middle of your three scores. For example: if your Transunion score is 725, your Equifax 700 and your Experian 713, your bank will use 713 as your score for qualification.
Your bank will not only use your credit score for qualification, they will also take into account how much debt you have. This means that just because you have a high credit score, doesn’t necessarily mean you will qualify for the home you are looking for. Let’s take a look at a scenario:
Let’s say you have a middle score of 720, which is a very good score. You currently have a few payments each month consisting of a car payment of $300 a month, student loans of $200 a month and two credit cards totaling $100 a month. These monthly payments are based on the minimum payment required on each loan for each month. This would bring your total monthly debt (without mortgage payment) to $600, which would be used for your front ratio for qualification (see DTI).
Now, you are a salaried employee making $48,000 a year, which is $4,000 a month. Let’s say your total mortgage payment for the house you are looking for will be $1500, based on what you qualify for with your credit score. This would bring your total monthly debt to $2100 a month. This would make your back end ratio (see again DTI) 52.5%, which would not be a qualifying ratio. Even though you have a very high credit score, you will not qualify for this particular home. This does not mean you can’t buy a home. You have several options in this situation: You can pay down some debt to lower your monthly obligation, look for a cheaper home, or get a friend or family member to co-sign on the loan to increase your monthly income. Talk to a mortgage professional for all of your options.
Taking a cosigner on your loan means that the bank will need to also take their credit report into account. This means that for scoring, the bank will use the lower of the middle scores from you and your cosigner. Example:
Your 3 scores- 680, 690, 702. Your middle score- 690
Your cosigner’s scores- 655, 670, 648. Their middle score 655.
Score used for qualification- 655
Even though a cosigner can help with income qualification, they can hurt you with credit score qualification. It is important to keep this in mind when you want and/or need a cosigner on your loan.